Gazprom seeks to broaden global energy role

June 24, 2005
OAO Gazprom wants to diversify its assets by acquiring oil production, broading its natural gas production, expanding its European gas exports, and entering the electric power market, Gazprom Chairman Alexey Miller said.

By OGJ editors
HOUSTON, June 24 -- OAO Gazprom wants to diversify its assets by acquiring oil production, broading its natural gas production, expanding its European gas exports, and entering the electric power market, Gazprom Chairman Alexey Miller said.

"The company is keeping a steady pace towards expansion, with substantial measures stepped up for the conversion into a world-class energy firm," Miller said June 24 at an annual general meeting in Moscow.

"The corporate business structure will resemble that of the largest global energy market players, such as ExxonMobil [Corp.], BP [PLC], or Royal Dutch/Shell [Group]," he said.

Gazprom has transferred a 10.74% interest to the Russian government, which plans to pay $7.13 billion for the stake by yearend. The government's controlling stake in Gazprom enables it to allow more trading of Gazprom shares to international investors (OGJ Online, June 16, 2005).

"The share capital structure will become more transparent, with the controlling stake owned by the state and the rest by private investors," Miller said, adding that market liberalization will contribute to long-term corporate value growth.

Gas production
Gazprom produced 545.1 billion cu m (bcm) of gas in 2004, a 4.9 bcm increase from 2003 and 3.1 bcm above its 2004 target.

Last year, Gazprom commissioned Yety-Purovskoye gas field, the Pestsovaya area of Urengoyskoye gas-condensate field, and the Aneryakhinskaya area of Yamburgskoye field.

In addition, Gazprom intends to produce gas from new provinces, including the Yamal Peninsula, the Arctic shelf, eastern Siberia, and the Far East, Miller said. In a news conference after the annual meeting, Miller told reporters that Gazprom might try to acquire oil fields near Sakhalin Island from state oil company OAO Rosneft.

Another possibility is that Gazprom might discuss cooperating with Rosneft in its Sakhalin holdings, he said.

Overloaded pipeline
Miller acknowledged that growing production rates have overloaded the company's pipeline, United Gas Transmission System. During 2004, UGTS transported 687.4 bcm of gas, with 33 independent gas suppliers gaining access and transporting 100 bcm.

"Substantial investments are needed to maintain UGTS and adapt it to growing gas deliveries," he said. "Gazprom has been implementing since 2002 a comprehensive program for the existing infrastructure debottlenecking. Higher reliability of the gas transmission network has been identified as a priority investment."

Synchronized commissioning of gas transmission and production capacities also is a key strategy, he said.

Gas exports
Miller noted Gazprom currently distributes gas to Russian consumers at state-regulated prices. "Without the gas-market liberalization, we won't get rid of the well-known defects and disadvantages typical to the existing gas distribution system in our country. Establishing a competitive primary energy market. . .is a solution," he said.

Starting next year, Gazprom intends to charge more for gas sold to former Soviet Union republics and Baltic states, he said. "We're determined to raise prices and shift over to purely market-based business mechanisms, excluding non-transparent barter deals and debt cross-cancellation," he said. "Gas exports to Europe are the only source of profit for Gazprom today."

Russian gas accounts for 26% of the gas consumed in Europe, he said, adding that Gazprom is working to expand its market share by establishing spot and short-term deals, trading hubs, and developing gas storage facilities there.

The company's priority, long-term focus is the European market, he said. Gazprom hopes to export 180-190 bcm in 2010.

Since 1999, Gazprom has traded gas on short-term contracts in the UK. In 2003, Gazprom supplied 2.1 bcm to the UK, and 4 bcm in 2004.

Miller said the UK gas import potential "is quite impressive, and is set to amount to tens of billions cubic meters by the year 2010."

Electric power
Gazprom also wants to transform its electric power generation involvement from "merely an investment sector into a core business," Miller said.

He noted Shell, BP, and other majors are developing power generation businesses. "The global energy industry formation is for Gazprom a primary indication that gaining access to the market of end services and productions is of crucial significance today," Miller said.